The following post was co-authored by R Street Tech Policy Associate Joe Kane. 


This week, the Department of Justice (DOJ) formally challenged AT&T’s proposed acquisition of media conglomerate Time Warner by filing a complaint to block the merger with the U.S. District Court for the District of Columbia. Despite this challenge, the merger should be allowed to proceed, as both the facts and legal precedents strongly suggest that DOJ’s challenge lacks merit.

Time Warner produces video content and programming through its Warner Bros., Turner Broadcasting System and HBO subsidiaries. AT&T distributes content from Time Warner and other producers through its wireline, mobile and satellite networks. These two firms don’t compete against each other in any relevant market, so this represents a classic example of a vertical merger. It is very rare for the DOJ to challenge a vertical merger such as this, and even rarer for the courts to block one — it hasn’t happened in decades.

Vertical mergers are almost always pro-competitive and pro-consumer in nature. It’s horizontal mergers, in which competitors in the same market seek to combine, that are more likely to be problematic and thus subject to antitrust scrutiny. AT&T abandoned its attempt to acquire T-Mobile in 2011, for example, after the DOJ filed suit to block it. With vertical mergers, however, the combined firm can achieve valuable efficiencies that it can pass onto consumers in the form of lower prices and/or better products or services. And no firms exit the market, so consumer choice does not decrease. Thus, the benefits to consumer welfare from such mergers almost always exceed any corresponding harms.

Here, the efficiency gains that AT&T and Time Warner could achieve are both obvious and substantial. In addition to benefitting from economies of scale (e.g., by combining their legal teams or human resource departments), control over the entire chain of distribution for Time Warner’s premium video content — from the production studio to the viewer — could allow the combined firm to deliver premium content to AT&T subscribers at substantially lower costs, or to develop new service offerings to compete with the innovative video services being developed by the likes of Apple, Amazon, Netflix and Disney.

The combined AT&T-Time Warner may well have greater leverage and bargaining power in carriage negotiations — Time Warner may get better deals with other distributors when licensing its content and AT&T may get better deals with other programmers when licensing their content. That may squeeze competing programmers and distributors, including giants like Disney and Verizon, by eating into their profit margins and forcing them to innovate in order to survive in the market.

But the antitrust laws don’t protect competitors; they protect competition. The recent vertical merger between Comcast and NBCUniversal — which was allowed to proceed despite identical concerns about increased leverage in carriage negotiations — is indistinguishable from the proposed AT&T-Time Warner merger. There is simply no reason to change course now and block AT&T’s acquisition of Time Warner.

The DOJ surely knows how weak its case is, so expect to see further negotiations about merger conditions in the coming weeks. AT&T has already signaled that it’s unwilling to accept any structural conditions, such as divesting political lightning rod CNN, but a targeted behavioral condition governing the licensing of Time Warner’s content to competing online video distributors, like Sling TV, may be enough to grease the wheels and get this merger over the line.

Whether AT&T is willing to accept such conditions, or whether it pushes its hand in court to try to get the merger approved without any conditions, remains to be seen. Regardless, the benefits from the merger would be substantial and undeniable, far outweighing any likely harms. AT&T’s acquisition of Time Warner should be approved posthaste.